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There are two ways to install games on your Sony PSP (Play Station Portable).

The legit way is to buy original UMDs and insert them in your PSP and game on.

For the not-so-affluent, you can install Custom Firmware (CFW) on your PSP and thendownload games off the internet and copy them to your PSP and play them.
Play ISO / CSO Games on your PSP

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1. Install Custom Firmware:

- There are scores of tutorials on the net on how to do this. The easier way out would be to go to any console shop, and get your PSP modded with CFW for around Rs. 200 / $5.

- A detailed tutorial on this coming up soon.

2. Download the Game ISO / CSO.

- Next, search for the game you want, and download the ISO / CSO of the game from torrent sites or any warez forums. Most of the times, the ISO / CSO is compressed into a RAR file so you will need to extract it first using WINRAR.

- Open your PSP drive in My Computer, and goto the ISO folder. If it isn't there already, create a new folder and rename it to ISO.

- Copy your ISO or CSO files to the ISO folder and disconnect your PSP from the computer.

4. Play the Game on your PSP

- Goto the GAME icon > Memory Stick and select the Game you just copied. Press 'X' and game on.

Note:1. You need to have CFW (Custom Firmware) installed in order to use ISO / CSO games on your PSP. The latest version of CFW is 5.00 M33-4.2. The latest PSP 2004 with TA 088 v3 chips and the PSP 3000 aren't moddable yet.

Your CSO/ISO files should be in your ISO folder in the root of your memory stick. You might have to make this folder if you don't already have it. Also, your UMD mode have to be set to NO UMD REQUIRED, or M33 Driver. You must have Custom Firmware to play ISO/CSO games.

is your PSP modified/CFW? if not it wont play cso or iso games. When u formatted your memory stick it will create ISO folder in the root of the memory stick. you said you created the folder, sounds to me that your not using CFW. this wont work.

If your using CFW/modified then format your memory stick using format option of your psp. Copy the cso/iso files to the ISO folder and that should work.

You cannot play .iso or .cso files (or any homebrew games) on your PSP unless you have firmware 1.5 or a custom firmware. Any "off-the-shelf" firmware such as 4.2 will not support these types of files. They will just show up as "Corrupted Data".

You can go through the process of downgrading your firmware from 4.2 to 1.5, then from 1.5 you may upgrade to a custom firmware such as 5.00 m33-4. Doing so would require a good deal of technical know-how and a LOT of patience. If you do not want to risk ruining your PSP, do NOT try this. Research methods of downgrading such as "Pandora's Battery" and other firmware downgraders.

You were able to download games from the PSP website because they are programmed to play on the current firmware. Even if you were to (somehow) properly convert the .iso or .cso files to an EBOOT.PBP file, it would not run unless you have firmware 1.5 or custom.